Construction Contractors Who Owe the IRS

Why construction businesses end up owing the IRS

Construction money moves in lumps (deposit, progress draws, retainage months later) while taxes are due on a calendar. When a job runs long, the tax money is usually spent first. Balances fall into three groups:

• Your own income and self-employment tax. If you are a sole proprietor or single-member LLC paid by the job, nothing is withheld. Self-employment tax of 15.3% (IRS.gov, 2026) (12.4% Social Security plus 2.9% Medicare) applies once net earnings reach $400, on top of income tax. The general picture is in our 1099 tax bill guide.
• Payroll taxes for your crew. Withheld income tax and Social Security and Medicare reported on Form 941. This is the balance that can become personal.
• Taxes tied to your subcontractors. Information returns, backup withholding, and worker classification.

Business balances sit under your EIN and come with their own notices, such as a CP504B notice of intent to levy. Personal balances arrive as a CP504. How entity type decides who owes what is explained in our small business owners guide.

Paying subcontractors: Form 1099-NEC and backup withholding

Every sub you pay creates paperwork the IRS checks. Get it wrong and the cost lands on you.

Why a missing W-9 can become your tax bill

Publication 1281 tells payers that if a payee refuses or neglects to give a TIN, they must “begin backup withholding immediately on any reportable payments” and keep withholding until the TIN arrives. Backup withholding is reported on Form 945. Under IRC 3406(h)(10), amounts subject to backup withholding are treated as if they were withheld from wages, and IRC 3403 makes the payer liable for tax it was required to withhold. In plain terms: if you paid a sub in full without a W-9, the IRS can assess the 24 percent you should have held back against you. A CP2100 or CP2100A notice listing mismatched IDs starts set deadlines in Publication 1281 to send “B” notices and begin withholding.

The fix is a habit: collect a signed Form W-9 before the first check, and do not release payment until you have it.

Subcontractor or employee? Classification is a tax question

Many crews are paid as subs because it is simpler. The IRS does not go by the label. It looks at three categories of evidence:

• Behavioral: does the company control, or have the right to control, what the worker does and how the worker does the job?
• Financial: are the business aspects of the work, such as how the worker is paid, who provides tools and whether expenses are reimbursed, controlled by the payer?
• Type of relationship: are there written contracts or employee-type benefits, and is the work a key part of your business?

The IRS says no one factor decides it. If you treat an employee as a contractor without a reasonable basis, the IRS says you “may be held liable for employment taxes for that worker.” That can mean back employment taxes on years of pay, usually after an audit; see IRS audits for the self-employed.

Three IRS routes exist if you are unsure:

• Form SS-8 asks the IRS to decide a worker’s status. The IRS warns a determination may take at least six months.
• Section 530 relief can apply when you had a reasonable basis for not treating workers as employees and filed the required information returns consistently (Publication 1976).
• The Voluntary Classification Settlement Program lets eligible businesses reclassify workers as employees for future periods with partial relief from federal employment taxes. You apply on Form 8952.

Classification calls involve judgment and real money; advice before you act is usually worth it.

Payroll taxes: the balance that can follow you personally

The income tax and employee Social Security and Medicare you withhold from your crew are trust fund taxes. If the business does not pay them over, the IRS can assess the Trust Fund Recovery Penalty against any person who was responsible for paying them and willfully failed to. The penalty equals the unpaid trust fund tax. Willful does not require bad intent: the IRS treats paying suppliers, equipment notes or other creditors with available funds while deposits slide as a sign of it. You have 60 days from the letter proposing the penalty to appeal (75 if it is addressed to you outside the United States).

Making payroll on Friday but not the deposit is the costliest habit in the trade. Our Trust Fund Recovery Penalty guide covers the Form 4180 interview and how to designate voluntary payments to the trust fund portion. The business-side options are on the Fresh Start page for payroll tax balances.

How the IRS reaches progress payments, retainage and equipment

Not without warning. The IRS must send a bill and then a final notice of intent to levy at least 30 days before levying, usually an LT11 or Letter 1058. You have 30 days (IRS.gov, 2026) from that notice to request a Collection Due Process hearing; our final notice action plan walks through those days. After that:

• Money a general contractor or owner owes you. The IRS generally levies business receivables on Form 668-A served on the payer. A levy reaches what is owed when it is served (IRC 6331(b)). The IRS manual says a levy also reaches future payments under a fixed right that does not depend on more work. Applied to a job, that generally means amounts owed for work already done can be reached, while draws for work you have not done yet need a new levy. Details are in IRS levies on 1099 income and receivables.
• Federal jobs. Publication 594 says the IRS does not have to offer a hearing before levying a federal contractor, and the Federal Payment Levy Program can take up to 100 percent of payments to federal vendors for goods or services (IRC 6331(h)).
• Your bank account. A bank levy takes what is in the account when it arrives; the bank holds it 21 days (IRS.gov, 2026) before sending it. See IRS froze your bank account.
• Trucks, machines and tools. For an individual taxpayer, such as a sole proprietor, property used in the trade or business is exempt from levy unless an IRS official approves the levy in writing after finding other assets are not enough, or collection is in jeopardy (IRC 6334(a)(13)(B) and (e)(2)). Separately, books and tools of the trade are exempt up to $5,990 (IRS.gov, 2026) in total value for 2026 (IRC 6334(a)(3), Rev. Proc. 2025-32). Equipment owned by an LLC or corporation does not get the individual protection. How seizures work is in IRS property seizures.
• The lien. A federal tax lien attaches to all business property, including receivables. See the federal tax lien notice page and Fresh Start tax lien relief.

Payment options that fit a contracting business

Treat the business and the owner as two balances with two plans:

A pending installment agreement request generally stops new levies while the IRS reviews it (IRC 6331(k)), and entering a plan is a ground for releasing an existing levy. While an approved plan runs, interest continues at the federal short-term rate plus 3 percentage points, reset quarterly (7% (IRS.gov, Jul-Dec 2026) this quarter). If a revenue officer has been assigned, read what to do before the first meeting.

Example: a remodeling contractor with three subs

Tony files 1099-NECs for all three subs by January 31, 2027, gets the drywaller’s W-9 before paying him again, and starts quarterly estimates. If his 2026 Form 1040 balance is under the individual Simple Payment Plan limit, he can set up the plan online the day he files. The Form 945 balance is a separate business balance under his EIN.

Records to gather and your next step

1. IRS notices, personal and business, with the date of any final notice.
2. A W-9 for every sub, plus the 1099-NECs you filed and proof of filing.
3. Job files: contracts, draw schedules, pay applications and retainage owed, which show what a levy could reach.
4. Payroll records: Forms 941 and 940, deposit history from EFTPS, and who decided which bills got paid.
5. Equipment list: what you own, who holds title, and loans against it.

The IRS says to keep employment tax records for at least 4 years after the tax is due or paid, whichever is later. A one-year personal balance under the Simple Payment Plan limit is usually a do-it-yourself fix online. Free help is available from the Taxpayer Advocate Service (877-777-4778 (IRS.gov, 2026)) and Low Income Taxpayer Clinics. Help is more likely to pay for itself with unpaid payroll quarters, a classification audit, a revenue officer, or a levy on a general contractor; see do you need a tax professional. Global Gate Tax Relief offers a free consultation and, if it takes the case, quotes a flat fee upfront; no outcome is promised. Request a free case review or call 1-877-800-8180.

Frequently asked questions

Keep reading in the Tax Liability Guide

• Trust Fund Recovery PenaltyWhen payroll taxes become personal.
• IRS levies on 1099 income and receivablesHow the IRS reaches money your customers owe you.
• IRS property seizuresWhen the IRS can seize vehicles and equipment.
• Small business ownersPersonal vs business liability by entity type.
• Fresh Start for payroll tax balancesBusiness Simple Payment Plans and Form 433-B.
• Got a final IRS notice?Your 30-day action plan.